Reporting a Business Unit's Performance

A business unit's report should be limited to one page and should be completed in 20 to 30 minutes. Nobody wants a dissertation, and nobody will read it. If the business unit manager is having problems, it is far too late to bring them up in the monthly report. The finance team should have alerted senior management during the month, and discussions should have been held then on what best to do.

Exhibit 7.1 is an example of a monthly business unit's report. The profit and loss statement (P & L) is summarized in 10 to 15 lines. Two graphs are shown; one looks at the trend of the major expenditure items and the other looks at revenue if a profit center, or a graph may contrast financial and nonfinancial numbers—in this case, tourist numbers against personnel costs.

An icon system has been established to highlight variances, as shown in Exhibit 7.1. A suggested way is to ignore all variances less than a certain amount. For all variances over this amount, allow a tolerance of, say, plus or minus 10 percent and show an icon for this, and then show as a positive or negative any variance over 10 percent. In this example the monthly variances threshold is $20,000, the year to date and year-end threshold are set at $100,000. For variances over these figures but within 10 percent, we show a “within tolerance” icon < > and no comment is required.

The notes are the main highlights and action steps to take. No other commentary is provided on the business unit's P & L. The business unit manager can discuss other issues in person with the CEO. Each business unit may have up to five different graphs, and the two that show the most pertinent information are shown in that month's report. Each business unit report will look slightly different. The titles of the key lines and graphs may be different.

Note the use of the graph titles to say something meaningful, treat them like a journalist treats the titles to their articles.

Value Stream Reporting

A new form of accounting has emerged, known as lean accounting. It is based on the lean concepts that first emerged within the Japanese multinational manufacturers.

If you are a manufacturing entity, then you need to explore this immediately. Value streams are a collection of products that share the same processes and include the costs from all people and resources involved in value stream. Brian Maskell said, “A value stream is a sequence of steps both value adding and non–value adding required to complete a product or service from beginning to end.”¹

Instead of looking at departments, business units, or product costs, we look at the value streams. These value streams can be one product or a cluster of products that go through a similar process. In Exhibit 7.2, we are looking at a company that makes only two products, a truck and a car.

Value stream accounting has come out of the lean movement with writers such as Brian Maskell and Frances Kennedy² who point out that accounting, control, and measurement methods need to change substantially.

Here are the main differences:

• Labor and machine costs are assigned directly to value streams using some simple cost driver, but such allocations are held to a minimum, certainly not using activity-based costing models. The existing labor force is not treated as variable unless you need to employ extra staff.
• Sustaining costs, which are necessary costs that support the entire facility but cannot be directly associated with particular value streams, are not allocated to value streams, but are shown in a separate column. Sustaining costs include management and support, facility costs, information technology, and human resource management costs that are not associated directly with a value stream.
• Inventory changes are reported separately as below-the-line adjustments and reported for the entire entity, not the separate value streams. This allows the value stream managers to assess their individual value streams without the complexities of the inventory changes affecting the value stream profit. If the company succeeds in adopting just-in-time inventory methods, the issue would largely disappear. Consequently, the motivation for manipulating inventory values also disappears.
• Under lean accounting, occupancy costs are actually assigned to value streams according to the amount of space used. Assignment of these costs provides motivation for the value stream teams to reduce occupancy costs. However, no attempt to absorb all of the occupancy costs is required. Space not used by a value stream is charged to sustaining costs. As a result, occupancy costs are handled in a similar manner to traditional accounting, but they are assigned to value streams instead of other cost objects such as products or divisions.
• Standard costs and price and volume variances—a backbone of classical management accounting—is abandoned.
• Very few allocations are used other than allocation of occupancy costs.
• Costing of a product is not related to the amount of labor or machine time expended. It is based on the rate of flow through the value stream. This issue is explored in more detail in Chapter 15.

Reporting Consolidated Profit and Loss

Exhibit 7.3 is an example of reporting a consolidated P & L account. This report summarizes the P & L in 10 to 15 lines. Instead of looking at consolidated costs, such as personnel, premises, and so forth, the report summarizes the expenditures of the divisions/business units. The two graphs shown in the exhibit look at the trends in major revenue and expenditure and a banner headline is used for the graph title.

A number of different graphs will be maintained and the most pertinent ones will be shown. The notes are the main highlights and action steps to take. The YTD budget is not shown, as this is by now wildly out of date. Instead, we show YTD as a percentage of the most recent year-end forecast, highlighting where the forecast might be too optimistic or too pessimistic. This forecast would be revised once a quarter, and not monthly, as already discussed in Chapter 3 on month-end reporting.

There is no other commentary on the P&L. The icons are fully automated based on preset criteria.

One-Page Finance Report for the CEO

All CEOs like a great summary page where they can see the whole picture. In my research I came across this one-pager that I believe is an excellent example of clever reporting. On one A3 page (U.S. standard fanfold), the finance team has summarized the areas to note, financial performance year to date, reviewed the major business units, and commented on the summary P & L and balance sheet (see Exhibit 7.4). The concept here is to give the CEO a summary of the financial report that is easier to read than the full finance report.

Once you have designed this carefully, you will find, I am sure, that this page becomes the main report. Both sides of the page can be used. The back side of the page could include summary business unit performance, or ranking tables for retail branches, or a dashboard summarizing financial and nonfinancial information, as shown in Chapter 8. Whatever you include on the back side, ensure that you do not go below a 10-point font size.

Reporting the Balance Sheet

Exhibit 7.5 is an example of a summary balance sheet with rounded numbers in millions, more rounded than the numbers in the P/L (e.g., tell management that debtors owe just under $3.2 million rather than $3,189,235; I can assure you, most will remember $3 million but forget the other number).

The balance sheet should have no more than 10 categories following the 10 percent rule discussed earlier. Each additional category in the balance sheet serves to confuse management and benefits only the accountants. The graphs focus on main balance sheet issues such as debtors' aging, stock levels, aging of key operational assets (e.g., average age of different types of planes), and cash levels.

Reporting a Quarterly Rolling Accrual Forecast

The update of the year-end forecast should occur once a quarter, as explained in Chapter 16. Exhibit 7.6 shows a number of features worth discussing:

• Only show monthly data for the next six months. After that, quarterly is sufficient.
• Only forecast at category status, never at account code level.
• Forecast each category line to the level of accuracy the CEO would expect; for example, top line of revenue in Exhibit 7.5 is forecast to nearest $0.5 million, other revenue lines to nearest $0.1 million.
• Forecast 18 months forward.
• The expenditure graph looks at the three main expenditure lines and highlights where budget holders are playing the old game of hiding funds in case they might be needed.
• The revenue graph highlights the reasonableness of the sales teams' projections.
• Commentary is restricted to bullet points.

Chapter 16 explains the reasoning and the foundation stones of a rolling forecasting process.

Cash Flow Forecasting

Cash flow forecasting is error prone for many of us. It is very hard to get it right for the following reasons: lack of information—we do not know when major customers are paying us; no historic analysis of daily cash flows; no historic tracking of the large receipts; a lack of use of electronic receipts and payments; and often a lack of understanding and coordination with the organization's buyers and sales staff.

The forecast process includes several building blocks of a better-practice daily cash flow.

Enter the certain figures first

• Rent, rates, leases, loan repayments, loan interest, payroll, taxes are all certain payments.
• Identify separately the cash flow of your major customers (over 10 percent of sales) as they are more certain.
• On one line, identify the cash flow of all other customers who have signed up for a direct debit (DD)—it is a good idea to offer continuing discounts to customers to accept direct debiting onto their bank account.
• Identify payments to your major suppliers (over 10 percent of total spend) paid by DD or by direct credit (DC) initiated by the supplier.
• On one line, identify the payment to all minor suppliers paid by DC.

Trap the history of your daily cash flows

• You will need at least the last 24 months of cash flows data in the same categories that you are forecasting in—the best place for storing this historic data is in a forecasting application.
• Use trend graphs in your forecasting application to help understand seasonal fluctuations—remember, you need to go back twice as far as you look forward.

Use appropriate time frame

• Look forward at least to week 5 in working days and to week 13 in weeks—the month-end is irrelevant for cash flow forecasting, as a cash flow crisis comes at any time.
• It is normally okay to cash flow model in months from month 4 onward—this modeling can be automated from the accrual forecasting model. In some cases, a cash flow is projected out two financial years or for a rolling 24-month period.

Use automatic feeds to the cash forecasting application

• Use daily major receipts from accounts receivable.
• Tax payment calculations can be automated.
• For key customers, cash flows can be accurately predicted in the short term.

Do cash flow forecast on a planning application, not Excel

• Put the cash flow on an appropriate forecasting application—Excel is best left to noncore activities such as designing a report template or one-off diagrams. See Chapter 4 for the reasoning behind this statement.

Exhibits 7.7 and 7.8 show the short-term cash flow predicted by day and the longer-range one going out in months, which typically would be generated from the accrual forecast via standard timing amendments.

Monthly Sales Report from Stephen Few

Sales reports can be very detailed covering many pages or screens, or you can follow the reporting rules and get a summary report on a page or on a smart phone's screen.

Stephen Few³ has introduced a new concept that is well worth understanding—a combination of a spark line and bullet graphs (see Exhibit 7.9). A spark line graph looks like a line graph without the axes. Even with this truncated diagram you can still see the trend. The bullet graph shows different detail about current performance. The shades are good to poor performance, and the dark vertical line indicates the target.

Stephen Few is very cautious about the use of color. He points out that many readers will have some form of color blindness. In Exhibit 7.9, the only use of color would be red bullet points indicating the exceptions that need investigation and follow-up.

Reporting Capital Expenditure

There are two main issues with reporting capital expenditure (CAPEX). First and most important, there will be CAPEX slippage. Worse still is the fact that the aim of CAPEX was to improve working conditions, improve quality of products/services, increase profitability, and so on. If an office renovation has been approved, why is it completed in the last month of the year? Surely it would have been better for it to have been completed in the first couple of months, as the staff would have the benefit of it. We therefore need a report (see Exhibit 7.10) that contrasts the percentage of capital spent on key projects against the percentage of the year gone. The aim is for status of the CAPEX projects to beat the year-gone progress bar.

Second, it is important to control the CAPEX approval process. During the life of a CAPEX project, there might be signs that it is going over budget. Normally, this is hidden from the board until management is sure there is a problem. If you have a process whereby the board is informed about the possibility of CAPEX exceeding the budget as soon as it is recognized the board has time to act. The board can make the decision whether to require a formal application for the additional expenditure or defer until more information is known about the magnitude of the over expenditure. In Exhibit 7.11, the board would hold off as there is still half the project to go so the over expenditure might not eventuate. The board might flag that a progress brief is required by the project manager for the next meeting or request a new CAPEX approval application.

The One-Page Investment Proposal

One of the important principles that make Toyota so successful is the need for transparency. This view is carried through to its investment proposals. All proposals have to fit on an A3 page (U.S. standard fanfold; see Exhibit 7.12). Condensing a major investment into an A3 page is a very difficult task. The one-page summary ensures clarity of thought and reduces the possibility that the proposal will be 50 pages because it represents a $500 million investment. Toyota has recognized that a large investment document will not be read or fully understood by all the decision makers. In fact, the larger the document, the less there is “clarity” for decision making. A must-read book to understand the guiding principles of Toyota is The Toyota Way by Jeffrey Liker.⁴

Daily Sales Report

If the CEO and SMT receive a report on the daily sales, they will better understand how the organization is performing. Exhibit 7.13 shows the sort of detail they will be interested in.

Weekly Key Customers' Sales

In a similar vein, it is important for the SMT to monitor how products are being purchased by the key customers. This is especially important after the launch of a new product, or after your competitors launch a new competing product. In Exhibit 7.14, the organization has three main products and three key customers. Sales made on minor products have been shown in two groups.

Weekly Reporting on Late Projects and Late Reports

Many managers are innovative people who love to get on with a project but often fail to tie up the loose ends or finish it. I am always encountering projects which are stuck in limbo. They will be of value to the organization only when someone refocuses on them. Exhibits 7.15 and 7.16 present two report formats that I believe should be presented weekly to senior and middle management to enable them to focus on completion. Exhibit 7.15 has a dual focus, on the project manager and the project. Exhibit 7.16 is a shame and name list targeting overdue reports. It focuses management on those reports that are well past their deadline. The version number helps management realize the cost of revisions. The manager's in-tray column focuses on the guilty manager and helps encourage action.

Daily and Weekly Reporting of Performance Measures

For a performance measure to be important, it needs to be reported during the month as opposed to at the end of the month. Visit Chapter 18 to understand how to develop, implement, and use winning key performance indicators.

Checking Internal Consistency

We need to ensure that all reports are totally consistent internally. Many accountants are aware of a process that they first saw when they were auditors. You start off by marking all pages with a number (e.g., for a five-page report, mark 1 of 5, 2 of 5, see Exhibit 7.18). For every number that appears elsewhere—either in a box, table, or graph—write the page reference where it appears again, by the page number, and initial to indicate that you have checked this number in the subsequent page and that it is correct.

This quality assurance document should be left around so the CEO sees it one day. When asked what are all these references and red ink, you say, “This is the quality assurance we do every time we issue a report to you.” I assure you the CEO will be impressed and want you on important projects.

The Two-Person Read-Through

For all reports going to the senior management team, CEO, or board, you should use a two-person read-through. I learned this technique when I was an auditor.

The originator of a report gets another person to read aloud the report while they follow the words on another copy. By hearing the words, the writer can check the “dance of the words,” their rhythm, and thus amend to correct spelling, grammatical errors, and make it an easier read. Where the reader has faced difficulties with your report, I can assure you the CEO will as well if the process of the two-person read-through has not been done.

Text-to-Voice Facility

The quick access bar on Microsoft Word, PowerPoint, and in Outlook has a “speak selected text” option. This is a valuable tool for a read back. I use this facility on all emails and smaller documents.

This facility does not replace the two-person read-through on those important reports, as you will miss out on some collective editing that occurs when two minds are working on the one document.

There are many sophisticated software applications that now will convert speech-to-text and text-to-voice. If you have one of these, I would use the text–voice capability instead of the simpler read back facility Microsoft applications provides.

The Final Check for the “Two Gremlins”

The two-gremlin rule states that in every piece of work there are always at least two gremlins that sneak through. If I find them and they are minor, I leave them and release the report. If you do not find them, look again or someone else will spot them.

Remember that you need a sense of perspective here; if minor, do not alter, as the cost both in time delays and reprinting may not merit the change. If spotted, you simply congratulate the person, saying, “Well spotted.” Never, never mention these errors. Let your managers find them if they can.

I would always change typos in the first couple of pages or in the recommendations, as these can undermine the report.

Designing Dashboards

Exhibit 7.19 lists common problems with dashboards, utilizing Few's wisdom. It also includes some examples of poor dashboards, as illustrated in Few's book.

Problem & Symptoms	Example of Poor Graphics
Exceeding the boundaries of a single screen: Here, Few is warning us to think about the design carefully and avoid giving the reader the option to access alternatives. We need to define what should be seen instead of leaving the manager to click on an icon to get the important data.
Introducing meaningless variety: Don't introduce myriad different graphs just because you can. Don't use a graph if a table would be better, and don't use a pie chart when a horizontal bar graph would be better.
Arranging the data poorly: Make sure issues are linked together. Position graphs about the same subject together on the dashboard.
Using a lot of color to highlight everything: Few points out that many readers cannot distinguish between certain colors, and it is better to be a minimalist with color, only using red to highlight areas of concern.
Cluttering the screen with useless decoration: Managing the white space is important. Only things that matter to the reader should be included.

Designing Graphs

Besides the rules for dashboards there are additional rules for graphs used in reports. Exhibit 7.20 lists advice with graphs utilizing Few's wisdom and some better-practice solutions I have observed over the years.

Advice	Graph Alternative
Supply adequate context for the data: Far too often, we show speedometer graphs that do not give enough information as to what is good or bad performance. Source: Stephen Few, www.perceptualedge.com
Avoid displaying excessive detail or precision: Graphs should summarize the information and be a big-picture view. The graph should have no more than a five-point scale and this should avoid unnecessary precision. For example, use $5 million instead of 5,000,000.00. Why do we need to show 23.4% when 23% would suffice?
Always start the scale at zero: Often, to emphasize a point the press will show an exchange rate within a very narrow band—say US$ to euro within a five-cent range, magnifying the movement. Few is adamant that this may mislead and give rise to poor decisions. Better to express the graph starting the scale from zero.
Avoid using these graphs: The following graphs should be banned from use: Pie charts Radar graphs Three-D graphs Few points out that it is far better to use a horizontal bar graph instead of a pie chart.	Source: Stephen Few
Make one data series the baseline: Few also points out the benefit of making one data series the baseline and showing the other as a variance to it. For example, actual shown against a budget, which is on the baseline. Source: Stephen Few, www.perceptualedge.com
Show a minimum of 15 months' trend analysis: Trend analysis is required, going back at least 15 months to ensure any seasonality in the operations is captured. Remember, business has no respect or interest in your year-end. It is merely an arbitrary point in time.
Avoid using a YTD budget line: There is no room to show a flawed monthly or year-to-date budget line, an arbitrary apportionment of the annual planning number that was done at the last minute and was wrong from the very start.
Explain turning points: Key turning points on graphs should be explained by a note on the graph, and comments need to highlight major issues. Source: Stephen Few, www.perceptualedge.com
Use up to five gridlines and a yellow background: The gridlines on the graph should be limited to around five lines. I always make these a medium tone of gray. Black on yellow is the best combination for clarity, so when using color graphs, make the background a faint yellow.
Color your combination graph axis: These are very useful, especially when comparing a financial cost against a nonfinancial.
Use the graph title to say something important: Like a journalist, you need to treat the title as important “real estate.” If you cannot say something important, maybe you should use a different graph.